FLT - Flight Centre Travel Group
- Thread starter It's Snake Pliskin
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Don't hold and haven't held this one before.
But FLT at an EBIT/EV of 8-9x is fairly interesting, because future returns are not pegged as much to the "blue sky" overseas expansion as they are defending the current earnings base from growing competition.
Historically the key FLT's success was developing and leveraging their strong brand name by rapidly expanding their footprint (store network) with very little capital requirements. They have always been known as the place to go to for low cost airfares in Australia and as their operational scale has grown, so has their bargaining power over the airlines. FLT is better at selling travel to their clients than the airlines are direct, and have used this power to obtain better prices from the carriers themselves.
I don't believe that there is a high correlation to the "high AUD" (against the USD) as a lot of experts / analysts seem to believe. Australians love travelling and will spend money on it when they have it. The rapid growth of overseas travel in Australia (we have been a net importer of travel since the late 1990s) has been fuelled, not by the high AUD, but by international airfares becoming much, much cheaper than they were at any point in history over the last 15-20 years. The expansion in the capacity of both airports and airlines in Australia and technological improvements have greatly helped this.
The big threat to FLT's empire as commonly identified is the internet, which is undeniably taking a bigger share of the travel pie each year. Perhaps it is telling that FLT is the only "bricks and mortar" travel agent that has held up: so far. They are still the market leader in all forms of travel sale in Australia, I believe it is about 9% share in 2014.
The internet threat is on two overlapping fronts: internet travel reseller sites and the Do-It-Yourself research and booking trend.
Internet operators have a much lower cost base, but at the moment lack the same "customer experience" / "knowledge base" / "personalised advice regime" of a trained travel agent (at least for now, I do understand that data-mining and data personalisation are rapidly developing). A lot of the advantage that a travel agent has is the fact that a lot people prefer to seek guidance in decisions that are important to them or would like as much of the hard work done for them as possible (human nature). The internet does provide a lot of good information, but due to its fragmented, disorganised nature, can be inaccessible to a lot of users.
Flight Centre does also have the brand name, and the customer buy-in in Australia, to continue developing and promoting their own digital interfaces to compete in both the "on demand" internet booking space and the bricks and mortar segment. But their competition is fairly stiff from some of the very large global internet travel sites (although I do believe there is room for both bricks and mortar and internet operators in the market and will continue to be into the long-term).
I believe that the market is now starting to factor some of the structural changes that the industry faces into the share price. I am still undecided on whether it has priced "too much" of these in at this point.
Does anyone else have any thoughts? Or even an alternative view on different themes would be appreciated.
But FLT at an EBIT/EV of 8-9x is fairly interesting, because future returns are not pegged as much to the "blue sky" overseas expansion as they are defending the current earnings base from growing competition.
Historically the key FLT's success was developing and leveraging their strong brand name by rapidly expanding their footprint (store network) with very little capital requirements. They have always been known as the place to go to for low cost airfares in Australia and as their operational scale has grown, so has their bargaining power over the airlines. FLT is better at selling travel to their clients than the airlines are direct, and have used this power to obtain better prices from the carriers themselves.
I don't believe that there is a high correlation to the "high AUD" (against the USD) as a lot of experts / analysts seem to believe. Australians love travelling and will spend money on it when they have it. The rapid growth of overseas travel in Australia (we have been a net importer of travel since the late 1990s) has been fuelled, not by the high AUD, but by international airfares becoming much, much cheaper than they were at any point in history over the last 15-20 years. The expansion in the capacity of both airports and airlines in Australia and technological improvements have greatly helped this.
The big threat to FLT's empire as commonly identified is the internet, which is undeniably taking a bigger share of the travel pie each year. Perhaps it is telling that FLT is the only "bricks and mortar" travel agent that has held up: so far. They are still the market leader in all forms of travel sale in Australia, I believe it is about 9% share in 2014.
The internet threat is on two overlapping fronts: internet travel reseller sites and the Do-It-Yourself research and booking trend.
Internet operators have a much lower cost base, but at the moment lack the same "customer experience" / "knowledge base" / "personalised advice regime" of a trained travel agent (at least for now, I do understand that data-mining and data personalisation are rapidly developing). A lot of the advantage that a travel agent has is the fact that a lot people prefer to seek guidance in decisions that are important to them or would like as much of the hard work done for them as possible (human nature). The internet does provide a lot of good information, but due to its fragmented, disorganised nature, can be inaccessible to a lot of users.
Flight Centre does also have the brand name, and the customer buy-in in Australia, to continue developing and promoting their own digital interfaces to compete in both the "on demand" internet booking space and the bricks and mortar segment. But their competition is fairly stiff from some of the very large global internet travel sites (although I do believe there is room for both bricks and mortar and internet operators in the market and will continue to be into the long-term).
I believe that the market is now starting to factor some of the structural changes that the industry faces into the share price. I am still undecided on whether it has priced "too much" of these in at this point.
Does anyone else have any thoughts? Or even an alternative view on different themes would be appreciated.
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Gets valued pretty cheap by the market. Less than 12 EV/NPAT.
Has all the metrics you look for, growing ROE, Margin, EPS, with best balance sheet in the ASX100.
Qualitative threats are online competitors and plateau of outbound travel.
Has all the metrics you look for, growing ROE, Margin, EPS, with best balance sheet in the ASX100.
Qualitative threats are online competitors and plateau of outbound travel.
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Wondering how much exposure they had to fly in fly out truck and digger driver madness in the mining sector.
You'd think that will pretty quickly become a historical head shake in the rear vision mirror.
Though the margins are smaller there was a fair bit of it!
According to the boss the outbound travel gig isn't as dependent on high or low Aus $ as most punters imagine.
A little hard to believe and I believe that's where the big bucks are.
The local stuff doesn't pay as well so an increase in Chinamen visiting the Kakadu on the cheap Aus $ may not be enough.
But like you say if that's all not a problem the metrics seem fundamentally attractive.
Has it bottomed and is it time to go long? Soon to be decided!
You'd think that will pretty quickly become a historical head shake in the rear vision mirror.
Though the margins are smaller there was a fair bit of it!
According to the boss the outbound travel gig isn't as dependent on high or low Aus $ as most punters imagine.
A little hard to believe and I believe that's where the big bucks are.
The local stuff doesn't pay as well so an increase in Chinamen visiting the Kakadu on the cheap Aus $ may not be enough.
But like you say if that's all not a problem the metrics seem fundamentally attractive.
Has it bottomed and is it time to go long? Soon to be decided!
I think FLT has bottomed out.
They say the australian leisure travel market has reduced, but the macroeconomic environment is leading towards more travel for australians.
- All time low interest rates with potential for another rate cut in February 2015 (more discretionary income as lower interest payments for home owners)
- Low fuel costs, cheaper fuel costs for vehicles, domestic travel and we are starting to see a reduction in fuel surcharges amongst airlines (virgin and qantas). Airline tickets are now so competitive and much cheaper than 20 years ago.
- Low AUD, yes it is more expensive now to travel overseas. However this means consumers will travel more domestic to say QLD/Gold coast. This also means its cheaper for overseas tourists to travel to australia.
All in all, IMO FLT will increase from here.
They have started increasing the revenues from UK/US and with the low AUD this will assist with FX spreads.
Also, they have potential to move into other travel/OTA/accommodation markets internationally.
cheers
They say the australian leisure travel market has reduced, but the macroeconomic environment is leading towards more travel for australians.
- All time low interest rates with potential for another rate cut in February 2015 (more discretionary income as lower interest payments for home owners)
- Low fuel costs, cheaper fuel costs for vehicles, domestic travel and we are starting to see a reduction in fuel surcharges amongst airlines (virgin and qantas). Airline tickets are now so competitive and much cheaper than 20 years ago.
- Low AUD, yes it is more expensive now to travel overseas. However this means consumers will travel more domestic to say QLD/Gold coast. This also means its cheaper for overseas tourists to travel to australia.
All in all, IMO FLT will increase from here.
They have started increasing the revenues from UK/US and with the low AUD this will assist with FX spreads.
Also, they have potential to move into other travel/OTA/accommodation markets internationally.
cheers
Hi leyy
I think there are two sides to heavily reduced airfares (due to increased competition and lower fuel costs).
Historically lower prices have meant that outbound travel from Australia has increased substantially. Will this continue? How close are we to critical mass? If there is low capacity growth, or no capacity growth in the medium term what does this do to earnings?
Does it also mean that FLT requires more transactions to maintain the same TTV? The big question, and yes they have been able to do this historically, is will capacity grow in the Australian market, and will FLT be able to win business vs. competitors and maintain the same margins? What are the risks to earnings if they cannot?
I am also concerned re: earnings cycle. Are the current earnings near the peak? I think there is some chance that their earnings are heavily tied to discretionary spending, rather than the AUD.
I don't know the answer to these questions.... but I feel they are important.
I think there are two sides to heavily reduced airfares (due to increased competition and lower fuel costs).
Historically lower prices have meant that outbound travel from Australia has increased substantially. Will this continue? How close are we to critical mass? If there is low capacity growth, or no capacity growth in the medium term what does this do to earnings?
Does it also mean that FLT requires more transactions to maintain the same TTV? The big question, and yes they have been able to do this historically, is will capacity grow in the Australian market, and will FLT be able to win business vs. competitors and maintain the same margins? What are the risks to earnings if they cannot?
I am also concerned re: earnings cycle. Are the current earnings near the peak? I think there is some chance that their earnings are heavily tied to discretionary spending, rather than the AUD.
I don't know the answer to these questions.... but I feel they are important.
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Pretty intriguing that FLT had a negative day on one of the best breakout confirmation days ASX has ever had, this side of the GFC. Up 2.3% FLT down .08% after having risen with the market to start with.
Seems to be saying somethings wrong.
Markets up over 5% in 10 days with financials and airlines and retail all up.
Yet FLT down 3%
Seems to be saying somethings wrong.
Markets up over 5% in 10 days with financials and airlines and retail all up.
Yet FLT down 3%
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Fly in and out to drive a truck? Nope. That was never gonna last!
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Landing gear appears to have been deployed.
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Agree. Have been trading this every day this week...today the dynamics started to shift a bit. Might still test the ~$32 support but perhaps not with the sudden ferociousness that was coming over the past few days..
skc
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Starting to sound like a broker record now... FLT has another downgrade yesterday - I think it's the 3rd since Dec 2014 (puntuated by one upgrade in Sept 2015). What makes this one worse is that:
- FLT only re-confirmed guidance 2 weeks ago in the Macquarie Conference (albeit with the proviso that meeting guidance would not be a formality).
- FLT cited external factors (e.g. Oz election, Britexit poll) impacting the results. These echo those expressed by QAN and VAH, but not CVO, WEB and CTD.
- FLT also mentioned further investments.
So it appears that FLT, at a minimum, is having less visibility in earning forecasts. Given that FLT has a relatively high fixed cost base (being largely a traditional travel agent), any operational deleverage could play out quickly.
It's not that expensive on fundamental measures (PE ~12.5-13 times) and has a clean balance sheet... but PBT has gone backwards for 3 years in a row (FY14 $376m, FY15 $363m, FY16 $354m).
Early warning sign of it's business model? Or a mere transition period before the next phase of growth?
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HLO also upgraded their TTV forecast for the year a couple of weeks ago. That's a company that has gone through a pretty substantial rebranding/online update, and recently merged with AOT.
I reckon it's too early to call the end – it takes a long time to turn a big ship – but I've been pretty impressed that the model has held up as well as it has. I just wonder how well margins will hold up over the long term, and whether those margins will be able to sustain the large shopfront business. I don't think it's a leap of faith to think there will be some rationalisation of shops.
WEB is being pretty brave giving b2b segment EBITDA forecast out to 2017, I think. The market won't like if it pulls up short. I think this is a really tough industry to be in. Lots of consolidation going on too, which usually means no one has a clear competitive advantage.
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CTD is actually one of the best performers on ASX200 today...not too sure what's going there. Surely some of the factors that are at play for FLT are also weighing on CTD??
Maybe they have enough slack up their sleeves from recent acquisitions to buffer the headwinds.
I am not as familiar with the CTD model, I assume being predominantly 'corporate' that their branch presence is likely much smaller. I see that they have Asia as their biggest TTV contributor, which is one of the only areas that FLT didn't have an excuse for
:FLT is one of the companies that I have in the SMSF, so my thoughts are clearly that the business model is not dead and instead that they are investing for the next leg of growth. Transformation is occurring with a deeper push into the online space along with many other non-online growth investments with it.
TTV growth is still very solid, so to me it looks as if the model is 'okay' and once they surpass this period of high price deflation that they will be able to grow earnings again.
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Average broker targets (6 of them released yesterday) is 35.19.
Long tail on the daily, currently.
short term res at approx. 34.
Long tail on the daily, currently.
short term res at approx. 34.
skc
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That's the thing.... airlines are reporting weaknesses so that's what FLT is also saying. But other travel agencies (WEB, CTD, HLO) has not been impacted like FLT. It doesn't feel like a structural issue (yet), especially given the timing of change in guidance - it's unlikely that a structural issue suddenly rear its head over a 2 week period causing the guidance to change.
But I do think FLT is losing some of it's competitive advantage. Initially, the business is about products and distributions. They have access to flights and holiday packages in physical shops all over town... it's the first port of call if you are going for a holiday. Obviously the internet these days mean neither of these are the trump cards that they once were.
So what else is left? I'd say it has plenty of brand equity and decent services, and the physical presence is still important for certain customer segments. It is still the largest out there so it should have a scale and hence cost advantage... but while it might get its products cheaper, its distribution cost has to be higher than other pure online models. So it probably doesn't have much competitive advantage in the price sensitive segment.
It probably doesn't have a technological advantage. It's booking site is no better or worse than most other offerings. And they are investing in something called Ask Betty - which sounds incredibly early 2000s.
My guess is that FLT will continue to decline in its dominance. PBT will ebb and flow as external factors swings about... but overall profitability might continue to fall gradually as its competitive advantages are slowly eroded. May be it can pull something out of the hat, but there'd be a fair bit of self cannabilisation to get there.
I am not as familiar with the CTD model, I assume being predominantly 'corporate' that their branch presence is likely much smaller. I see that they have Asia as their biggest TTV contributor, which is one of the only areas that FLT didn't have an excuse for
Same here. I hope I knew it better 4 years ago.
Lol... my mind must be programmed to type trading related words subconsciously...
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Got out at 33. Doesn't look like 34 will eventuate at the moment.
Problem with FLT is they don't have a large online presence, and it is the ignorance of the MD and senior executive team which will see this as their demise unless they can get their act together. 10 years ago bricks and mortars were the way to go to book a holiday see a travel agent. I can't remember the last time i went to a travel agent. yes there will always be a niche market and demand especially for the baby boomers and the elderly. most of the time i walk past a flight centre there is 3-4 staff members and zero customers.
They can't compete with the OTA's (Priceline Group/Booking.com and Expedia/Wotif) FLT are big but not big enough.
They need to look at some acquisitions for online presence whether for flights or hotels.
WEB is purely online presence via B2C and B2B which keeps overheads low and has the ability to grow organically very fast.
I would like to add also that with the competition of the low cost carriers FLT does not sell these fares (jet star, tiger, scoot etc etc) they are losing lots of business.
Margins have not grown also!! they are not big enough to push commissions increase.
For example, OTA commission has grown from 8% to 15% in the last 5-7 years.
Guest where FLT are? they are still sitting at circa 10%.
For what its worth i hold both FLT and WEB.
They need a management shakeup and really focus on internet/mobile and have a strong digital presence otherwise it won't be good news in the next 5-10 years. Especially with all the technology disruptions like Air BNB and metasearch websites like skyscanner and hotelscombined.
my 2c.
They can't compete with the OTA's (Priceline Group/Booking.com and Expedia/Wotif) FLT are big but not big enough.
They need to look at some acquisitions for online presence whether for flights or hotels.
WEB is purely online presence via B2C and B2B which keeps overheads low and has the ability to grow organically very fast.
I would like to add also that with the competition of the low cost carriers FLT does not sell these fares (jet star, tiger, scoot etc etc) they are losing lots of business.
Margins have not grown also!! they are not big enough to push commissions increase.
For example, OTA commission has grown from 8% to 15% in the last 5-7 years.
Guest where FLT are? they are still sitting at circa 10%.
For what its worth i hold both FLT and WEB.
They need a management shakeup and really focus on internet/mobile and have a strong digital presence otherwise it won't be good news in the next 5-10 years. Especially with all the technology disruptions like Air BNB and metasearch websites like skyscanner and hotelscombined.
my 2c.
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Appeared to have a more convincing blow off low today.
Perhaps the algos are interpreting the flight to safety as a boon for flight center.
Perhaps the algos are interpreting the flight to safety as a boon for flight center.
skc
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One year since the last post, and the profit yo-yo of FLT continues. Yesterday it delivered an upgrade (which is actually an upgrade to a downgraded guidance)... the share price however is up around 2 year highs.
For the record, PBT trend is still down year on year, for the 4th year in a row.
FY14 $376m
FY15 $363m (-3.6%)
FY16 $354m (-2.5%)
FY17 $325-330m (-8.1%)
Yes FY17 H2 is looking stronger than pcp... but at PE ~20x for a business that isn't showing much sign of sustained growth, the valuation feels a bit full.
I traded yesterday's announcement with a "sell the news" slant given the share price action leading into it... and the market slapped me silly. Let's see if day 2 makes any difference.
For the record, PBT trend is still down year on year, for the 4th year in a row.
FY14 $376m
FY15 $363m (-3.6%)
FY16 $354m (-2.5%)
FY17 $325-330m (-8.1%)
Yes FY17 H2 is looking stronger than pcp... but at PE ~20x for a business that isn't showing much sign of sustained growth, the valuation feels a bit full.
I traded yesterday's announcement with a "sell the news" slant given the share price action leading into it... and the market slapped me silly. Let's see if day 2 makes any difference.
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I saw that yesterday too, the market reaction was very strange. Given all the geographies they are in, I could understand if the market was ascribing a high valuation to a a segment of the business, but none of them seem to be stand-out, unless I'm missing something. They have about $400m net cash on the balance sheet, but even that doesn't bring the multiple down by much. Weird.
ETA: If you have a look at how fast Expedia, Priceline, Tripadvisor etc are growing they must be taking revenue from FLT.
